Opposition Brief — American General Finance, Inc. v. Branch

Upreme Cour US

FILEN

i AUG = %

( y) UG 2001

No. 00-1934 | _ ORR OF Tre cum |

IN THE

Supreme Court of the United States

American General Finance, Inc.,

Merit Life Insurance Co., and

Yosemite Insurance Company,

Petitioners,

V.

Mable Branch,

Respondent.

On Petition for a Writ of Certiorari to the

Supreme Court of Alabama

RESPONDENT?’S BRIEF IN OPPOSITION

TO PETITION FOR WRIT OF CERTIORARI

Barry A. Ragsdale Michael J. Quirk

(Counsel of Record) F. Paul Bland, Jr.

Garve W. Ivey, Jr. Trial Lawyers for Public

Ivey & Ragsdale Justice , P.C.

1615 Financial Ctr. 1717 Massachusetts Avenue,

505 North 20" Street NW, Suite 800

Birmingham, AL 35203 Washington, D.C. 20036

205/327-5223 202/797-8600

—

TABLE OF CONTENTS

Page

pee Pl rere ee il

reer rrr er Cr er er Ter er yee |

STATEMENT OF THE CAGE 2... 25 ccc cece ccceces 2

A. The Parties’ Loan Transaction ................. 2

B. The Loan Transaction in the Reaves Case ........ 3

G. American General Finance’s Mandatory

| FP Pe T OC PE ECT TTTT Se +

D. The State Trial Court Proceedings .............. 6

E. The Alabama Supreme Court’s Holding ......... 9

pO rc er en ery Perey ee 10

I. The Decision of the Court Below is Cinsiilias with

First Options and Other FAA Cases Addressing

Arbitration of “Arbitrability” Disputes ......... 11

I] The Holding that Petitioner’s Arbitration Clause is

Unconscionable is Both Fact-Specific and Consistent

with Prevailing Authority on State Contract Law and

Pe UI Nos oa sub ud dN eS Seeks 16

ee er re rere eee rere rere ee ee 24

TABLE OF AUTHORITIES

Cases:

Abram Landau Real Estate v. Benova, 123 F.3d 69

("Ci OO) sca eae a Seas 15

Alexander v. Standard Oil, 423 N.E.2d 578 (Ill. 1981) ... 2!

Armendariz v. Foundation Health Psychare Services,

mut. © PIG GR (OM. BOOP vn ccc vce secuvess 19

Arnold v. United Companies Lending Corp., 511

Hw ee er ee 19

Cole v. Burns Int'l Security Serv’s, 105 F.3d 1465

CEA... GA. TSB ick ks ccdaven Olas wee aene 20

DeGaetano v. Smith Barney, Inc., 983 F. Supp. 459

GARI Es Ee 6a soos ce cea ee eee 20

Derrickson v. Circuit City Stores, Inc., 81 Fair Emp].

Prac. Cas. 1553 (D. Md. 1999), aff'd 203 F.3d

821 (4" Cir.) (table), cert. denied, 530 U.S.

OE Terre re ee es eet 20-21

Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681

(| Perr See Re 16-17, 23

Doctor's Associates, Inc. v. Hamilton, 150 F.3d 157

PGR TI chick ei

First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938

(1DDS) occ nvccccscccccccsccccscvscsscen 13-14

Gibson v. Neighborhood Health Clinics, Inc.,

121 F.3d 1126 (7 Cir. 1997) .... 2.0220 - ee eee 20

Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20

(1991) occ cncccccccccsccecccccscccees 17, 23

Hull v. Norton, 750 F.2d 1547 (11" Cir. 1985) .....---- 20

Koveleskie v. SBC Capital Markets, Inc., 167 F.3d 361

(7™ Cir. 1999) 2.2... eee eee eee rece ee eees 21-22

Lane v. Garner, 612 So.2d 404 (Ala. 1992) .......-- 9,17

Lloyd v. Service Corp. of Ala., 453 So.2d 735

(Ala. 1984) ........ee cece eee eee reese 17-18

Lozada v. Dale Baker Oldsmobile, Inc., 91 F. Supp.2d

1087 (W.D. Mich. 2000) ......--------ee+5: 20

Matterhorn, Inc. v. NCR Corp., 763 F.2d 866 (7 Cir.

PGBS) cnc ccncccsccdcccccccccecrccccsccess 13

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,

Inc., 473 U.S. 614 (1985) ....--- eee eee eee eee 17

Painewebber, Inc. v. Elahi, 87 F.3d 589 (1* Cir. 1996) .. 15

Paladino v. Avnet Computer Technologies, Inc.,

134 F.3d 1054 (11™ Cir. 1998) .....-------+++ 20

iii

Perez v. Globe Airport Security Services, 253 F.3d 1280

GPa EE bd addcividencasscue ee 20

Perry v. Thomas, 482 U.S. 483 (1987) ............... 23

Prevot v. Phillips Petroleum Co., 133 F. Supp.2d 937

Ge OU PEN b U0 Na a Nas cesta ihn be dees 14

Prima Paint Corp. v. Flood & Conklin Mfg Co.,

8, rr ere eS meee 1, 12-14

Showmethemoney Check Cashers, Inc. v. Williams,

ree Rm OR ee rer rT erry 19-20

Taylor v. Leedy & Co., 412 So.2d 763 (Ala. 1982) ...... 18

United Food and Commercial Workers Union v. Lucky

Stores, Inc., 806 F.2d 1385 (9" Cir. 1986)....... 15

Washington-Baltimore Newspaper Guild, Local 35

v. Washington Post, 959 F.2d 288 (D.C. Cir.

SPOS 00 0c0saseedwacdaee cee 14-15

We Care Hair Development, Inc. v. Engen, 180 F.3d

Se es Se aoc hoes sack danaw exceeds 22

Statutes and Regulations:

Alabama Uniform Commercial Code,

pe | POC eee rer rere 7, 16, 17, 23

Federal Arbitration Act, 9 U.S.C. §§ 1 ef seg. ...... passim

iV

INTRODUCTION

The opinion of the Alabama Supreme Court in this case

and the questions presented in the Petition for Certiorari do not

warrant a grant of this Court’s discretionary review. The

holding of the court below was highly fact-specific, based on

particular terms of the contractual arbitration provision at issue

and on a detailed evidentiary record as to contract formation

between these two parties. Indeed, the court below held that the

same mandatory arbitration clause was fully enforceable based

on different facts relating to contract formation in the

companion case of American General Finance, Inc. v. Reaves.

See Pet. 28a-29a. The narrow scope of the holding below thus

belies Petitioner’s contention that this case is worthy of review

because the court below exhibited a “general anti-arbitration

bias.” Pet. 3. It did nothing of the sort.

Nor does the opinion below conflict with authority from

this or other courts on the questions presented. The Alabama

Supreme Court heid consistent with Sections 2 through 4 of the

Federal Arbitration Act and this Court’s decision in Prima

Paint Corp. v. Flood & Conklin Mfg Co., 388 U.S. 395 (1967),

that a court must decide whether an asserted arbitration clause

is a valid and enforceable contract before a party can be ordered

into arbitration pursuant to it. Likewise, the court’s holding

that Petitioner’s mandatory arbitration clause is unconscionable

under the general standards of Alabama’s Uniform Commercial

Code as they apply to the facts of this case is consistent with

decisions of courts across the country. Petitioner fails to

identify any contrary authority holding either that a court may

order arbitration under the FAA without determining whether

the asserted arbitration agreement is unconscionable, or that the

FAA preempts generally applicable rules of state contract law.

For these reasons, the Court should not grant review on either

of the questions presented in the Petition for Certiorari.

STATEMENT OF THE CASE

Both the trial court and the Alabama Supreme Court

below relied on extensive evidence pertaining to the one-sided

formation and terms of the mandatory arbitration provision in

Petitioner American General Finance’s sub-prime loan contract

with Respondent Mable Branch to hold that it is unconscionable

and cannot be enforced in this case. The fact that the Alabama

Supreme Court upheld the very same arbitration clause in the

companion case demonstrates that the holding here is limited by

the combination of the particularly one-sided terms of this

arbitration provision and the detailed evidence of American

General’s control over formation of this contract with Ms.

Branch. The holding of the court below is also consistent with

decisions of this Court and courts across the country regarding

who decides whether an asserted arbitration agreement is

unconscionable as a matter of state contract law and regarding

the propriety of a party’s use of its overwhelming bargaining

power to impose a one-sided dispute resolution system that

unilaterally limits another party’s legal remedies.

A. The Parties’ Loan Transaction.

Over the year and a half period from July 1996 to

November 1997, Respondent Mable Branch took out a series of

three short-term, high interest loans from Petitioner American

General Finance, Inc. Ms. Branch borrowed money from

American General in July 1996, October 1996, and November

1997. Pet. 2a. She was described by the trial court below as

the kind of borrower to whom banks would not be expected to

provide loans. /d. at 46a.

2

Through its loans to Ms. Branch, American General

Finance is alleged to have collected excessive finance charges

and unnecessary or excessive premiums for credit disability and

life insurance. Jd. at 5a. American General also is alleged to

have sold duplicative services to Ms. Branch by “flipping” her

loans whereby she was induced to refinance existing loans at

additional costs. /d.

As a condition for obtaining its sub-prime loans,

American General required Ms. Branch to give up her right to

sue in court and instead submit any future claims she might

have against the lender to binding arbitration. American

General drafted all of the documentation for these loan |

transactions. Ms. Branch had no input into the content of these

documents and had no meaningful choice regarding the

arbitration requirement in seeking a loan through American

General Finance. Id. at 25a-26a. At the time of Ms. Branch’s

loans between July 1996 and November 1997, either 14 or 15

out of the 16 finance companies listed in the Tuscaloosa region

where Ms. Branch lived required that borrowers waive their

right of access to court and submit any future legal claims they

might have to binding arbitration as a condition for obtaining a

loan. Id. at 26a.

B. The Loan Transaction in the Reaves Case.

April Reaves also took out a series of short-term, high-

interest loans from American General Finance. Ms. Reaves

alleged that she too had to pay high finance charges and

unnecessary or excessive insurance premiums on her loans, and

that she was faced with American General’s sale of duplicative

services through the practice of flipping loans. Jd. at 5a.

Ms. Reaves obtained her loans from American General

in December 1994 and again in November 1995, before Ms.

Branch ever obtained any of her loans. /d. at 2a. During this

period when Ms. Reaves was borrowing, most finance

companies listed in the geographic area where she lived did not

require borrowers to submit to arbitration as a condition for

receiving their loans. /d. at 28a. By borrowing from American

General, Ms. Reaves submitted to the company’s binding

requirement of binding arbitration of all her future legal claims.

c. American General Finance’s Mandatory Arbitration

Clause.

The mandatory and binding arbitration requirement in

American General’s finance papers with Ms. Branch initially

appears to apply to all claims by either party. The arbitration

provision begins: “Borrower and lender agree that, except as

otherwise set forth herein in this provision, all claims, disputes,

or controversies of every kind and nature between Borrower(s)

and Lender shall be resolved by arbitration.” Jd. at 2a. But

several paragraphs later, near the end of the arbitration clause,

American General reserves only for itself the right to sue in

court for virtually any claim it could have against Ms. Branch:

Borrower(s) and Lender agree _ that,

notwithstanding the foregoing, Lender retains

the right to use judicial or self-help remedies (1)

to repossess or foreclose on collateral or to

enforce the security interests relating to this

transaction, and (ii) to pursue collection actions

against the Borrower(s) where the amount of the

debt is $10,000 or less. .

4

ee ee ee ee

Id. at 4a. Based on the size of Ms. Branch’s loans, this saves

from the arbitration requirement every foreseeable claim that

American General could ever bring against Ms. Branch.

American General’s protection of its own right to sue

Ms. Branch in court does not extend to any counterclaims

raised by Ms. Branch in such suits. Instead, American General

retains sole control over the forum for such counterclaims by

reserving the right to compel arbitration separate and apart from:

the litigation of American General’s claims against Ms. Branch:

The exercise of this right by Lender to pursue

judicial or self-help remedies shall not

constitute a waiver of Lender’s right to compel

the arbitration of any claim or dispute subject to

this arbitration clause—including the filing of a

counterclaim by Borrower(s) in a lawsuit filed

by Lender.

Id. American General’s arbitration clause with Ms. Branch also

provides that “all issues and disputes as to the arbitrability

of claims must also be resolved by the arbitrator.” Jd. at 3a

(emphasis in original).

In addition to the unilateral waiver of Ms. Branch’s

right to sue in court, American General’s arbitration clause

imposes limits on the legal remedies that are available to Ms.

Branch in arbitration. The arbitration clause limits the amount

of punitive damages for which American General may be held

liable to Ms. Branch in arbitration without regard to the degree

of culpability of its conduct:

BORROWER(S) AND LENDER AGREE

THAT THE ARBITRATOR MAY AWARD

PUNITIVE DAMAGES ONLY UNDER

CIRCUMSTANCES WHERE A COURT OF

COMPETENT JURISDICTION COULD

AWARD SUCH DAMAGES. HOWEVER, IN

NO EVENT SHALL AN AWARD OF FIVE

(5) TIMES THE ECONOMIC LOSS

SUFFERED BY THE PARTY.

Id. at 3a-4a. This arbitration provision also imposes a unilateral

prohibition on Ms. Branch’s participation in any class action

proceedings involving the lender: “BORROWER(S) AND

LENDER FURTHER AGREE THAT THE ARBITRATOR

SHALL NOT CONDUCT ANY CLASS-WIDE

PROCEEDINGS AND WILL BE RESTRICTED TO

RESOLVING THE INDIVIDUAL DISPUTES BETWEEN

THE PARTIES.” Jd. at 4a.

Finally, American General’s arbitration clause requires

that any arbitration between American General and Ms. Branch

shall be conducted according to the commercial rules of the

American Arbitration Association. Jd. at 3a. It further specifies

that “[e]ach party shall pay one-half of the arbitration costs and

expenses” of such commercial proceedings. Jd.

D. The State Trial Court Proceedings.

Mabel Branch sued American General Finance, Merit

Life Insurance Company, and Yosemite Insurance Company in

June 1998 in the Hale County, Alabama Circuit Court alleging

that American General’s predatory lending practices described

above violated Alabama statutory and common law. April

Reaves filed suit against these defendants in September 1998,

making substantially the same allegations. Jd. at Sa.

Petitioners moved the trial court to compel arbitration

of both actions based on the mandatory arbitration provision in

American General’s loan documents. /d. The trial court

consolidated the two cases for purposes of resolving the

arbitration issue. Jd. at 40a. Ms. Branch and Ms. Reaves

argued in response to Petitioners’ motions to compel arbitration

that the arbitration clause was unconscionable and therefore

unenforceable against them as a matter of general Alabama

contract law. After allowing discovery on the arbitration issues,

the trial court issued its decision on these motions based on an

extensive evidentiary record. Jd. at 40a.

The court first determined that it must apply general

state contract law to decide whether or not the parties had

agreed to arbitrate before it could address any assertion as to the

scope of American General’s arbitration clause. Jd. at 41a. The

‘court then applied Section 2-302 of Alabama’s Uniform

Commercial Code, which states the general rule that:

If the court as a matter of law finds the contract

or any clause of the contract to have been

unconscionable at the time it was made the

court may refuse to enforce the contract, or it

may enforce the remainder of the contract

without the unconscionable clause...

AL St. 7-2-302. Pursuant to Alabama Supreme Court precedent

on contractual unconscionability outside the arbitration context,

the trial court considered whether there was unequal bargaining

power and an absence of meaningful choice by one party in the

making of the asserted agreement to arbitrate, and whether the

terms of American General’s arbitration clause were patently

unfair and unreasonably favorable to itself as the controlling

party. Pet. 42a.

In addressing these factors, the trial court held that

American General’s arbitration clause was unconscionable as

it would apply in both cases because neither borrower had any

meaningful choice as to arbitration and because its terms

unreasonably favored American General. Pet. 46a-48a. In

support of its finding that Ms. Branch and Ms. Reaves had no

meaningful choice, the trial court cited to a number of facts

specific to these cases, including admissions by American

General that it made arbitration a mandatory condition for its

loans; stipulations by other area sub-prime lenders that they too

required arbitration during the period in question; and

testimony that the borrowers would not have been able to

obtain loans from a bank. Pet. 46a. In finding the terms of the

arbitration clause to be substantively unfair and unreasonably

favorable to American General, the trial court cited to the lack

of mutuality in the clause in allowing the lender to sue on

nearly all of its possible claims, the unilateral cap on punitive

damages that borrowers may recover, and the prohibition on

class actions by borrowers. Id. at 47a-48a. The trial court also

emphasized that American General’s stipulation purporting to

waive certain contractual prohibitions was further evidence

both that the terms of the arbitration clause were unreasonable

and that it was an adhesive contract subject to American

General’s complete control. /d. at 47a.

E. The Alabama Supreme Court’s Holding

The Alabama Supreme Court affirmed the trial court’s

judgment in part by holding that American General’s arbitration

clause is unconscionable only as it applies to Ms. Branch. The

court first affirmed that the unconscionability of the arbitration

clause is a threshold issue for the court to decide before the

parties can be ordered to arbitrate, and that the provision for

arbitration of arbitrability disputes takes effect only after a court

determines that the arbitration clause itself is enforceable. Jd.

at 20a-21a. The court then held that the trial court correctly

applied the indicia of unconscionability under general Alabama

contract law, reiterating the factors it had identified nearly ten

years earlier in a case not involving arbitration:

(1) whether there was an absence of meaningful choice

on one party’s part, (2) whether the contractual terms

are unreasonably favorable to one party, (3) whether

there was unequal bargaining power among the parties,

and (4) whether there were oppressive, one-sided or

patently unfair terms in the contract.

Id. at 21a (quoting Layne v. Garner, 612 So.2d 404, 408 (Ala.

1992)).

With regard to consumer choice and bargaining power

in the formation of this particular arbitration provision, the

court found that Ms. Branch had no meaningful choice as to

arbitration because American General had insisted on it as a

condition of the loans, as did all but one or at most two area

lenders at the time of these loans. Pet. 27a. The court found

that Ms. Branch had no meaningful choice as to arbitration

because she would have had to expend considerable time and

effort to find any alternative. Jd. at 27a. With regard to the

substantive terms of American General’s arbitration clause, the

court focused on the clause’s non-mutual nature in preserving

American General’s right of access to court for every

foreseeable claim it might have against Ms. Branch; the scope

of the unilateral arbitration provision in applying to every

conceivable claim of Ms. Branch (including claims regarding

arbitrability); and the punitive damages cap which would also

apply unilaterally to Ms. Branch’s claims in arbitration but not

to American General’s claims in court. Jd. at 22a-24a. The

court emphasized that the combination of these provisions, plus

the absence of meaningful choice by Ms. Branch, rendered the

arbitration clause unconscionable in this case. Jd. at 24a-25a.

In the same opinion, the Alabama Supreme Court held

that American General’s arbitration clause should be enforced

against April Reaves because she had failed to demonstrate an

absence of meaningful choice on her part as to arbitration. The

court found that lenders requiring arbitration were a minority

where Ms. Reaves was living at the time she secured all of her

loans and therefore that she could have found an arbitration-free

loan without considerable cost or effort. Jd. at 28a. The court

thus enforced American General’s mandatory arbitration

provision in her case despite its sweeping and one-sided terms.

ARGUMENT

There is no reason for this Court to review the narrow

and fact-specific holding of the Alabama Supreme Court in this

case. The court below focused on and limited its holding to the

detailed evidence regarding formation of this contract between

Petitioner and Respondent. Furthermore, the opinion of the

court below is consistent with this Court’s decisions and those

10

of appellate courts from around the country on both of the

questions presented. Petitioner has not identified a single case

where a court ordered a party into arbitration under the Federal

Arbitration Act, 9 U.S.C. §§ 1 ef seg., for the threshold

determination of whether the asserted arbitration clause that

would be the only basis for such an order is unconscionable and

therefore unenforceable. Furthermore, Petitioner has produced

no authority for its contention that the FAA preempts a State

court’s application of established and generally applicable

principles of unconscionability under the State’s Uniform

Commercial Code to a contractual arbitration provision. The

Court therefore should not take up either of the questions

presented in the Petition for Certiorari.

I. The Decision of the Court Below is Consistent with

First Options and Other FAA Cases Addressing

Arbitration of “Arbitrability” Disputes.

The Alabama Supreme Court’s holding that a court

must resolve attacks on the validity of an arbitration clause,

including its provision for arbitration of arbitrability disputes,

before the court may order a party into arbitration is a routine

application of the Federal Arbitration Act’s express provisions

and this Court’s interpretations of the Act. Section 2 of the

FAA states that contractual arbitration clauses are enforceable

“save upon such grounds as exist at law or in equity for the

revocation of any contract.” 9 U.S.C. § 2. Likewise, Section

4 empowers courts to compel arbitration of particular disputes

only “upon being satisfied that the making of the agreement for

arbitration or the failure to comply therewith is not in issue.”

9US.C. § 4.

11

Based on these requirements of the FAA, this Court has

drawn a sharp distinction between issues related to the validity

of an arbitration agreement, which a court must decide before

it can order arbitration of a dispute, and other issues relating to

contracts with arbitration provisions, which may be reserved for

the arbitrator if the arbitration clause itself is enforceable. In

Prima Paint Corp. v. Flood & Conklin Mfg Co., 388 U.S. 395

(1967), the Court held that a claim of fraud in the inducement

of a contract containing an arbitration clause is subject to

arbitration, but that a claim of fraud in the inducement of an

arbitration clause is for a court to decide under the FAA. Id. at

403-04,' The Court explained in Prima Paint:

This position is consistent...with the [FAA’s]

statutory scheme. As the “saving clause” in § 2

indicates, the purpose of Congress in 1925 was

to make arbitration agreements as enforceableas

other contracts, but not more so. To immunize

an arbitration agreement from judicial challenge

on the ground of fraud in the inducement would

be to elevate it over other forms of contract —a

situation inconsistent with the “saving clause.”

| Although Section 4 of the FAA applies to independent actions

to compel arbitration, Prima Paint held that the same rules apply to motions

under Section 3 to stay litigation on a claim and compel arbitration because

it would be “inconceivable that Congress intended the rule to differ

depending upon which party to the arbitration agreement first invokes the

assistance of a federal court.” Jd. at 404.

12

Id. at 404 n.12.2_ The lower court’s decision in this case

regarding who decides under the FAA whether a contractual

arbitration clause is valid and enforceable adheres to Prima

Paint, and Petitioner has identified no authority to the contrary.

Petitioner’s attempt to establish a conflict between the

holding in this case and First Options of Chicago, Inc. ‘v.

Kaplan, 514 U.S. 938 (1995), fails because the two decisions

address significantly different issues. In First Options, it was

undisputed that there was a valid arbitration agreement between

a stock trade clearing firm and a wholly owned investment

company. Jd. at 940-41. The parties’ disagreement was about

whether the scope of the arbitration clause was broad enough to

cover a claim by the clearing firm to recover the company’s

debts from its owners, and whether a court or an arbitrator

should decide this dispute over the scope of the arbitration

agreement. Jd. In answering the second question, this Court

held that a court should ordinarily decide whether a particular

dispute is covered by an arbitration clause, but recognized that

parties may by “clear and unmistakable language” allow an

arbitrator to make such an arbitrability determination. Jd. at

944-45. Since the dispute in First Options involved the scope

of a presumptively valid arbitration clause, the Court there had

no reason to revisit the issue decided in Prima Paint and raised

in the instant case of whether a party may be ordered into

arbitration before there is a determination that the asserted

arbitration agreement (which would be the only basis for such

an order) is a valid and enforceable contract.

? See also Matterhorn, Inc. v. NCR Corp., 763 F.2d 866, 867 (7"

Cir. 1985) (“although section 4...speaks only of challenges to ‘the making’

of the agreement to arbitrate, the term has been held to encompass any

challenge to the validity of the agreement, even if there is no disagreement

that it was ‘made.””)

13

The decision below is thus consistent with Prima Paint

and First Options in holding that a court must decide whether

an arbitration clause, even one that provides for arbitration of

arbitrability disputes, is a valid and enforceable contract before

it may order arbitration of any dispute. First Options nowhere

purports to overturn or modify Prima Paint. Indeed, First

Options never even discusses Prima Paint or the FAA’s

previsions that apply to disputes over the making and

enforceability of contractual arbitration clauses like that in the

instant case. Since Respondent’s unconscionability argument

goes to the making and original validity of the asserted

arbitration clause, it was properly resolved by the court under

the FAA’s provisions that this Court applied in Prima Paint.’

Having failed to demonstrate any conflict between First

Options and the decision of the Alabama Supreme Court below,

Petitioner identifies no other decision that would create a split

of authority on its first question presented. In Washington-

Baltimore Newspaper Guild, Local 35 v. Washington Post, 959

F.2d 288 (D.C. Cir. 1992), the court ordered arbitration of the

parties’ dispute over whether the arbitration clause in their

collective bargaining agreement applied to certain of the

employer’s pay-scale decisions. This was a dispute over the

scope, not the making and validity, of the arbitration clause.

Furthermore, this labor relations dispute was governed by

Section 301 of the Labor-Management Relations Act, 29 U.S.C.

§ 185, and thus gave the court no occasion to examine the

3 See also Prevot v. Phillips Petroleum Co., 133 F. Supp. 2d 937,

939 (S.D. Tex. 2001) ( case where injured workers did not speak English at

time of alleged arbitration “agreement,” holding that unconscionability

argument against enforcement of arbitration clause is for court to decide

under Prima Paint even where clause provides for arbitration of arbitrability

disputes).

14

Federal Arbitration Act’s provisions regarding the making of

agreements to arbitrate. Likewise, in United Food and

Commercial Workers Union v. Lucky Stores, Inc., 806 F.2d

1385 (9" Cir. 1986), the court ordered arbitration over whether

a union’s grievance complied with the specificity requirements

of a collective bargaining agreement’s arbitration clause. This

case too involved an interpretation of an arbitration agreement,

not a determination as to its underlying validity, and did not

involve the sections of the FAA that apply to this case.‘

In sum, the court below held that a party cannot be

forced into arbitration under the Federal Arbitration Act until a

court has first determined that an asserted arbitration

agreement, including one that provides for arbitration of

arbitrability disputes, is a valid and enforceable contract under

generally applicable state law. Petitioner has identified no case

holding to the contrary and therefore has established no basis

for this Court to grant review on the first question presented.

* Petitioner cites several cases in a footnote, see Pet. at 11-12 n.4,

which state generally that disputes over the validity and enforceability of

arbitration clauses involve issues of “arbitrability.” But none of these cases

conflict with the decision of the court below by holding under the FAA that

parties must go to arbitration to find out whether or not they entered into a

valid and enforceable arbitration agreement in the first place. See, e.g.,

Abram Landau Real Estate v. Benova, 123 F.3d 69, 72 (2™ Cir. 1997) (labor

relations case holding that question of on-going application of arbitration

clause was arbitrable because it required interpretation of other bargaining

agreement provisions, while noting parties’ agreement over original validity

and applicability of arbitration clause); Painewebber, Inc. v. Elahi, 87 F.3d

589, 599 (1* Cir. 1996) (holding that question of whether investors’ fraud

claims were time-barred by NASD arbitration rules is presumptively for

arbitrator to decide and is not a question of arbitrability).

15

Il. The Holding that Petitioner’s Arbitration Clause is

Unconscionable is Both Fact-Specificand Consistent

with Prevailing Authority on State Contract Law

and Federal Preemption.

Petitioner confuses the highly fact-specific holding of

the Alabama Supreme Court regarding the enforcement of its

contractual arbitration provision in this case for a generalized

attack on all arbitration agreements in all cases. The court

below applied Section 2-302 of the State’s Uniform

Commercial Code to hold that Petitioner’s arbitration clause is

unconscionable based on the combination of its particularly

one-sided terms and the detailed evidence showing that

Respondent had no meaningful choice as to arbitration in the

making of this loan contract. The limitation of this decision to

this combination of facts is demonstrated by the court’s holding

in the companion case that the same one-sided arbitration

clause was enforceable against another borrower who was

shown to have greater choice as to arbitration at the time of her

loans. Pet. 28a-29a. The decision below is neither a broad-

based attack on arbitration in general nor even an attack on all

applications of this particularly one-sided arbitration provision.

Instead, it is a narrow application of general rules of Alabama

contract law to the specific facts presented in this case.

The Alabama Supreme Court’s decision below is

consistent with the command of the Federal Arbitration Act and

this Court’s opinions interpreting the Act to subject contractual

arbitration provisions to the same rules of state law that apply

to other contracts. In Doctor’s Associates, Inc. v. Casarotto,

517 U.S. 681 (1996), the Court explained that Section 2 of the

FAA places arbitration agreements on the same footing with

_ other contracts so that “generally applicable contract defenses

16

such as fraud, duress, or unconscionability, may be applied to

invalidate arbitration agreements without contravening § 2.” Jd.

at 687. Likewise, in Gilmer v. Interstate/Johnson Lane Corp.,

500 U.S. 20 (1991), the Court noted Section 2's savings

‘provision and warned that “‘courts should remain attuned to

well-supported claims that the agreement resulted from the sort

of fraud or overwhelming economic power that would provides

grounds for the revocation of any contract.’” Jd. at 33 (quoting

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473

U.S. 614, 627 (1985) (internal quotation omitted)). The court

below did just this, applying previously recognized and”

generally applicable indicia of unconscionability under the

Alabama U.C.C. and finding these indicia to have been

established through a detailed evidentiary record.

The Alabama Supreme Court held that Petitioner’s

arbitration clause is unconscionable in this case under indicia of

unconscionability that the court had recognized nearly ten years

earlier in a case that did not involve arbitration. Pet. 21a (citing

- Layne v. Gardner, 612 So.2d 404, 408 (Ala. 1992). The court

based its finding that Respondent had no meaningful choice as

to arbitration and was subject to Petitioner's overwhelming

bargaining power on an evidentiary record which demonstrated

that nearly every area lender required arbitration during the time

period in question and that Petitioner had made arbitration a

mandatory condition for its loans. Pet. 26a-28a. Petitioner

mistakenly asserts that the court below had never ruled outside

the context of arbitration that market prevalence is relevant to

the issue of consumer choice as an indicium of

unconscionability, Pet. 19. In Lloyd v. Service Corp. of Ala.,

453 So.2d 735 (Ala. 1984), the Alabama Supreme Court did

precisely this regarding the use of exculpatory clauses in

landlord-tenant contracts, finding that:

17

‘The tenant has no meaningful choices. He can

accept this landlord or go to another landlord

who charges the same rent and asks the tenant to

sign the same standard form lease. In other

words, the modern standard form lease is in

essence an adhesion contract. A survey of

residential leases in Alabama would show that

almost all contain these exculpatory clauses.’

... That consumer, in need of goods or services,

is frequently not in a position to shop around for

better terms, because all competitors use the

same clauses.

Id. at 739 (quoting Taylor v. Leedy & Co., 412 So.2d 763, 766

(Ala. 1982) (Faulkner, J., concurring specially).° The court’s

finding of procedural unconscionability in contract formation

is thus both fact-specific to this case and well-supported under

established principles of general Alabama contract law.

> Petitioner also mistakenly suggests that the court below ignored

its previous cases by finding unconscionability even though Ms. Branch is

an educated and sophisticated consumer. Pet. 16. This argument is flatly

contrary to the facts in the record: Ms. Branch is a self-employed beautician

in a rural community who took two years of cosmetology classes at a local

vocational school. Prior to working as a beautician, she was employed as

a laborer constructing wooden pallets. She testified in the case that she did

not understand the loan documents in the case, and specifically did not

understand the language of the arbitration clause. For example, Ms. Branch

testified that she does not understand the meaning of the word "litigate." In

light of this detailed record which conflicts with Petitioner's characterization

of the facts, there is no occasion for this Court to second-guess the integrity

of the Alabama Supreme Court's analysis of how Alabama contract law

applies to these facts.

18

NAM adic Be bemeed a RAT rnd! as Ondo oe’

Even in the absence of meaningful choice as that term

is defined under Alabama contract law, Petitioner’s arbitration

clause would likely have been enforced in this case had it not

also diminished Respondent’s substantive legal rights by

imposing a unilateral cap on her recovery of damages. The

Alabama Supreme Court nowhere said that market prevalence

of a contractual term by itselfrenders the term unconscionable.

Instead, the court invoked widely recognized standards of

substantive unconscionability in holding that the terms of

Petitioner’s particular arbitration clause are one-sided and

unreasonably favorable to American General.

The court emphasized the scope of the arbitration clause

as it would require arbitration of all of Respondent’s claims

(including those relating to arbitrability), while carving out

from this requirement every foreseeable claim that Petitioner

might ever have, and the fact that Respondent alone would be

subject to unilateral remedial limitations in arbitration. Pet.

22a-24a. A sizable body of case law from courts around the

country has similarly treated such non-mutuality as an indicium

of unconscionability.° Numerous courts have also recognized

© See, e. g., Armendariz v. Foundation Health Psychare Services,

Inc., 6 P.3d 669, 692-94 (Cal. 2000) (arbitration clause in employment

contract is unconscionable where it applies only to employee’s claims and

places unilateral limits on employee’s damages: “The unconscionable one-

sidedness of the arbitration agreement is compounded in this case by the

fact that it does not permit the full recovery of damages for employees,

while placing no such restriction on the employer.”); Arnold v. United

Companies Lending Corp., 511 S.E.2d 854, 861-62 (W.Va. 1998) (holding

arbitration provision in lender’s contract with elderly couple unconscionable

where lender “like rabbit and foxes” affected a “wholesale waiver of the

Armolds’ rights together with the complete preservation of United Lending’s

rights.”) (quotation omitted) Showmethemoney Check Cashers, Inc. v.

Williams, 27 S.W.3d 361, 365-66 (Ark. 2000) (payday lender’s arbitration

19

that arbitration provisions which limit a party’s access to legal

remedies that are available in court may be unenforceable.’

clause is unenforceable under Arkansas contract law for lack of mutuality

where lender’s collection claims are exempted but all of the borrower’s

claims are covered); Gibson v. Neighborhood Health Clinics, Inc., 121 F.3d

1126, 1131 (7 Cir. 1997) (arbitration clause in employment contract is

unenforceable under Indiana law for want of consideration where clause

applies to employee’s claims but exempts employer’s claims); Hull v.

Norton, 750 F.2d 1547, 1550-51 (11" Cir. 1985) (arbitration provision in

employment contract is unenforceable under New York law for want of

consideration where employer reserves own right to sue in court; court finds

no preemption because case falls within Section 2 savings clause).

7 See, e.g., Cole v. Burns Int'l Security Serv's, 105 F.3d 1465,

1482 (D.C. Cir. 1997) (arbitration must offer “all the types of relief that

would otherwise be available in court”); Paladino v. Avnet Computer

Technologies, Inc., 134 F.3d 1054, 1062 (11" Cir. 1998) (Cox, J.,

concurring for majority of court) (arbitrability of Title VII claims “rests on

the assumption that the arbitration clause permits relief equivalent to court

remedies. ... When an arbitration clause has provisions that defeat the

remedial purpose of the statute . . . the arbitration clause is not

enforceable.”); Perez v. Globe Airport Security Services, 253 F.3d 1280,

1286-87 (11 Cir. 2001) (holding arbitration clause that prevents prevailing

Title VII plaintiff from recovering attorney’s fees to be unenforceable);

DeGaetano v. Smith Barney, Inc., 983 F. Supp. 459, 469 (S.D.N.Y. 1997)

(voiding arbitration clause disallowing attorneys” fees for prevailing Title

VII plaintiff, concluding that “contractual clauses purporting to mandate

arbitration of statutory claims... are enforceable only to the extent that the

arbitration preserves the substantive protections and remedies afforded by

the statute.”); Lozada v. Dale Baker Oldsmobile, Inc., 91 F. Supp.2d 1087,

1105 (W.D. Mich. 2000) (finding as to consumer Truth In Lending Act and

state consumer protection act claims that “both federal and Michigan case

law support a conclusion that an arbitration provision is substantively

unconscionable because it waives class remedies, as well as declaratory and

injunctive relief”); Derrickson v. Circuit City Stores, Inc., 81 Fair Empl.

Prac. Cas. 1533 (D. Md. 1999) (arbitration clause capping punitive damages

and back pay remedies under Section 1981 is unenforceable), aff'd, 203

20

—

Sew

i ee

These cases hold not that all or most arbitration clauses

are unconscionable, but only that particular types of arbitration

provisions similar to those found here may be unconscionable

in certain cases. The holding of the court below is thus

consistent with case law recognizing the need for courts to

enforce general principles of state contract law in unusually

one-sided and unfair circumstances in order to prevent

businesses from abusing their bargaining power by turning

private arbitration proceedings into an occasion to diminish

unilaterally the substantivelegal rights of individual consumers.

Petitioner has identified no authority that conflicts with

the Alabama Supreme Court’s decision or supports the

extraordinary contention that preemption under the FAA

extends to prohibit enforcement of established standards of

unconscionability under a State’s Uniform Commercial Code.

In Koveleskie v. SBC Capital Markets, Inc., 167 F.3d 361 (7

Cir. 1999), the court held that an arbitration provision in an

employment contract was not unconscionable as a matter of

Illinois contract law whether or not it was adhesive because

there had been no attempt to show that its terms were

- Substantively unfair. Jd. at 367 (“the disparity in the size of the

parties entering into the agreement...withoutsome wrongful use

of that power,’ is not enough to render an arbitration agreement

“unenforceable.””) (quoting Alexander v. Standard Oil, 423

N.E.2d 578, 580 (Ill. 1981)). These requirements are entirely

consistent with the unconscionability standards applied by the

Alabama Supreme Court based on the very different contract in

this case. Both decisions closely examine disparities in

bargaining power during contract formation and substantive

unfairness in the terms of the arbitration clause. What’s more,

F.3d 821 (4" Cir.) (table), cert. denied, 530 U.S. 1276 (2000).

21

since Koveleskie turned on interpretations of Illinois contract

law, any perceived difference with the decision below would

not give rise to a question of federal law in any event.* Finally,

while Koveleskie stated in dicta that a hypothetical state rule

prohibiting enforcement of all pre-dispute arbitration

agreements would be preempted by the FAA, supra at 367, this

in no way conflicts with the instant case because the court

below never intimated such a rule and in fact enforced a pre-

dispute arbitration clause in the companion case.

Likewise, Petitioner’ sdiscussionof the Second Circuit’s

opinion in Doctor's Associates, Inc. v. Hamilton, 150 F.3d 157

(2™ Cir. 1998), establishes no conflict with the decision of the

court below here. First, the court in Hamilton rejected the

defendant’s unconscionability argument not because it was

preempted but because the party had waived the argument by

failing to raise it in the trial court. Jd. at 164. Hamilton did

hold that a state statute prohibiting forum selection clauses in

franchise contracts was preempted to the extent that it would

operate to prohibit enforcement of an arbitration provision in

such a contract. /d. at 163. But the court found that there was

preemption under Section 2 of the FAA because this statutory

rule was not generally applicable; rather it “applies to one sort

of contract provision (forum selection) in only one type of

8 For the same reason, Petitioner’s reliance on We Care Hair

Development, Inc. v. Engen, 180 F.3d 838 (7" Cir. 1999), invokes no

question of federal law. The Seventh Circuit there again applied Illinois

contract law to find that a franchise agreement’s arbitration provision was

not unconscionable based solely on its non-mutual nature. /d. at 843. It is

also noteworthy that the court in We Care emphasized the relative equality

in bargaining power between parties to a franchise contract, noting that “the

franchisees were not vulnerable consumers or helpless workers, but rather

business people who bought a franchise.” /d. (internal quotation omitted).

22

contract (a franchise agreement).” Jd. The rule of

unconscionability invoked by the Alabama Supreme Court in

this case, by contrast, applies to all contracts under the State’s

U.C.C. and has been recognized generally by this Court in

Gilmer and Casarotto not to be preempted based on the savings

clause in Section 2 of the FAA. Hamilton therefore does not in

any way conflict with the holding in the instant case.°

The Federal Arbitration Act’s goal of enforcing

voluntary agreementsto arbitrate is perfectly consistent with the

Alabama Uniform Commercial Code’s concern for ensuring

meaningful choice and substantive fairness in the formation of

contracts. Neither policy goal is satisfied where a borrower is

forced to submit to arbitration in order to obtain any loan and

where a lender abuses this advantage in bargaining power by

imposing a one-sided arbitration requirement that unilaterally

restricts the borrower’s available legal remedies. The holding

of the court below was narrowly based on a detailed factual

record on each of these points and does not conflict with

decisions of this or other courts on the scope of FAA

preemption. This case therefore does not warrant this Court’s

discretionary review on either of the questions presented.

° The argument herein that Hamilton does not conflict with the

holding of the court below is in no way a concession that Hamilton was

correctly decided under this Court’s FAA preemption rulings. The anti-

forum selection clause statute in Hamilton neither “takes its meaning

precisely from the fact that a contract to arbitrate is at issue,” Perry v.

Thomas, 482 U.S. 483, 492 n. 9 (1987), nor creates “threshold limitations

placed specifically and solely on arbitration provisions,” Casarotto, 517

U.S. at 688. Still, that question is not presented in the instant case because

the unconscionability ruling of the court below is neither limited to specific

types of contracts nor to specific types of contractual clauses.

23

CONCLUSION :

The petition for a writ of certiorari should be denied.

Respectfully submitted,

Barry A. Ragsdale Michael J. Quirk

(Counsel of Record) F. Paul Bland, Jr. 3

Garve W. Ivey, Jr. Trial Lawyers for Public 4

Ivey & Ragsdale Justice , P.C. 3

1615 Financial Center 1717 Massachusetts Ave., ”q

505 North 20" Street NW, Suite 800 4

Birmingham, AL 35203 Washington, D.C. 20036 4

205/327-5223 202/797-8600

Counsel for Respondent

Date: August 28, 2001

24